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Hi, I have a problem with the answer to BPP’s following question.
Ulysses owns 25% of Grant, which it purchased on 1 May 20X8 for $5 million. At that date Grant had retained earnings of $7.4 million. At the year end date of 31 October 20X8 Grant had retained earnings of $8.5 million after paying out a dividend of $1 million. On 30 September 20X8 Ulysses sold $600,000 of goods to Grant, on which it made 30% profit. Grant had resold none of these goods by 31 October.
At what amount will Ulysses record its investment in Grant in its consolidated statement of financial position at 31 October 20X8?This is BPP’s answer:
All calculations are in thousandsCost of investment – 5000
Share of post-acquisition profit (8,500 – 7,400) × 25%) – 275
PURP (600 × 30% × 25%) – (45)
Total – 5230My opinion is that if an associate (Grant) pays out dividends, then an investor (Ulisses) also gets its share. Therefor I think dividend income of Grant should be added back and share of post-acqusition profit should be like that
275+1000*0.25=525.Is my calculation wrong? Where do I make an error?
Hi,
Yes, it looks like you are correct as the dividend is recorded at a point in time and needs to be added back to get a full picture of how the company has performed in the year.
Thanks
Hi sir,
Why in this above qstn dividend is not added ??
The answer is 5230?. Is that because qstn tells at the year end date of 31 oct 2008 grant co had RE of 8.5 million after paying out dividend of 1 million?
So can you please explain me where I am wrong and why the previous ans dividend added shouldn’t be deducted??
Hi,
The dividend is paid out by the associate, and so is a reduction in the value of the investment. It is effectively a distribution of the associate’s profits.
Thanks
But sir in this other qstn Dividend deducted when calculating investment in associate
On 1 Febx3 Pinot co acquired 30%of the equity share of Nair co, it only associates for 10$million in cash, the profit for the year of Nair co for the year to 30sepx3 was 6$million. Profit accrued evenly throughout the year.Nair co made dividend payment of 1$ million on 1sepx3. At Sep x3 Pinot co decided impaired loss of $700000 should be recognised in investment in Nair co
Answer
COI. 100,000
Post acs
(6000*8/12-1000)*30%. 900
IMp. (700)
Total. 10200I am still confused that in this qstn Dividend deducted and earlier qstn not deducted and I see earlier post is added divided to get back share. Can you please explain me further. Thank u sir in advance
Hi,
In the example at the top we are given the figure of retained earnings but in the example you highlight above you are given the profit figure and not that of retained earnings.
Profit is before the deduction of a dividend, hence why it is then deducted.
Retained earnings is after the deduction of a dividend, hence why it is then not deducted.
Hope that clears it up for you.
Thanks
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